Head to head: Is there a right time to take CPP benefits?

While many Canadians can’t wait to start drawing down Canada Pension Plan benefits when they turn 65, it’s important to consider whether that’s the right move

Bonnie-JeanneMacDonald, director of financial security research at Ryerson University’s National Institute on Ageing

Delaying CPP is the safest, most inexpensive approach to receiving more secure retirement income. Yet 95 per cent of Canadians claim their CPP by age 65.

Why does it matter? CPP benefits last for the rest of your life and keep up with inflation. More than 96 per cent of Canadians aged 60 will survive to age 70, and nearly 50 per cent will live beyond age 90. Waiting until age 70 to take CPP would bring those benefits to about 150 per cent of what they would be at age 65 and about 250 per cent of what they would be at age 60.

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My research has found most Canadians with registered retirement savings plans are better off using a portion of those savings in early retirement as a bridge to a higher delayed CPP benefit, rather than stretching their RRSP withdrawals over their retirement.

The two strategies generate the same tax and guaranteed income supplement/old-age security eligibility implications, while survivor benefits are also unaffected. However, delaying CPP benefits offers greater reward and minimal risk from the perspective of retirement income security — even for those with relatively low longevity expectations and high investment returns.

Delaying CPP is essentially like purchasing an inexpensive, very secure defined benefit pension that keeps pace with inflation. Making the most out of the CPP is important for all Canadians, particularly for the more than 75 per cent of private sector workers who don’t have comprehensive workplace pension plans and will therefore rely on CPP and Canada’s social income program for their retirement income.

Read: When to tap into CPP and OAS benefits

It’s the responsibility of experts and advisors to clearly explain the value that collective pension programs like the CPP offer to lifetime income security, in terms of greater financial returns and much lower risk — all with the goal of protecting people’s future financial, social, mental and physical well-being.

Marshall McAlister, partner and private wealth counsellor at Mercer Global Investments Canada Ltd.

I have reviewed the CPP program in detail over many years, and I understand the arguments for both delaying and advancing the benefit payments from the standard age of 65. I would like to offer a few reasons why Canadians might consider taking the CPP benefit earlier than age 65 in order to maximize lifetime total benefits.

The first and most important factor when determining the start date is personal health.

If an individual isn’t operating at full health and has a shortened life expectancy, they should take the CPP early. The breakeven point for total benefit dollars between the lower pay-
ments at age 60 and the cumulative payment paid at age 65 is currently at age 72. If one should have doubts about being alive at age 72, taking the CPP payment early is a rational decision. By taking funds early, an individual can use the CPP funds for purchases and travel at a time when they have their highest level of health and energy.

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Another reason to take the CPP early is also connected to longevity, but this time it’s the death of a spouse. In many cases, this program will allow a surviving spouse to increase their CPP payment after the death of a spouse via a survivor benefit. However, the survivor benefit can only increase the CPP benefit up to an amount equal to the survivor’s benefit amount at age 65. As a result, should both spouses take CPP at age 65 or later, then there is no top-up for the surviving spouse should a spouse unexpectedly die.

Lastly, there’s an argument for high-net-worth individuals to take the CPP payment in order to lower overall taxes and maximize the OAS benefit. By taking the taxable CPP payment at 60, it’s possible that a portion of these payments will be taxed at a lower marginal rate. Also, by spreading out the payments over an additional five years, the lower annual income will reduce the risk of having the OAS benefit clawed back.

Read: Editorial: Communicating CPP enhancements and more pension action on the way